7.15.2007

Economic ViewFair Taxes? Depends What You Mean by ‘Fair’By N. GREGORY MANKIWPublished: July 15, 2007Recent claims that the rich do not pay their fair share in taxes don’t hold up under close examination.

Excerpt:

The best source for objective data on the distribution of the tax burden is the Congressional Budget Office. The C.B.O. goes beyond anecdotes and bald assertions to provide hard data on who pays taxes. One can argue about the details of its methods, but there is no doubt that it is nonpartisan and that its tax analysts are some of the best in the business.

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.

The FairTax Plan is a nonpartisan national grassroots campaign to replace the federal income tax system with a progressive national retail sales tax. It provides a "prebate" to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement and, through companion legislation, repeal of the 16th Amendment.

2 comments:

A big selling point for the "fair tax" seems to be that it is “progressive.” I’m not sure what “progressive” is meant to mean in the context of this tax proposal, but the so-called “fair tax” proponents seem to what to say that their tax proposal treats everyone the same while at the same time treating the poor in a manner that is “progressive.”

Define progressive. It sounds like double speak. “We’re concerned about the poor and so to show our concern we’re going to treat them exactly the same way we treat doctors and lawyers…”

We tax money. We tax it when it moves. I agree that the current system is fragmented and obtuse, and that there are loopholes that should be closed. But I haven’t heard a moral argument for taxing money when it moves away from you (when you spend it) instead of when it moves toward you (when you make it). Yet the “fair tax” crowd functions with a tone that presuppose the moral superiority of their position.

The truth is that the “fair tax” reduces the percentage of the federal budget that is collected from the rich and increases the percentage of the federal budget that is collected from the bottom half of society. It does so by NOT TAXING money that rich people decide NOT to spend. Rich people have the luxury of not spending large portions of their income; the poor and much of the middle class spend almost every penny they make in order to make ends meet. Under the “fair tax” those people (teachers, nurses, police officers, most military personnel, most industry workers, etc.) will pay taxes on a much larger percentage of their income than what doctors, lawyers, bankers and stock brokers will pay taxes on. How is THAT fair?

The fallacy of the “fair tax” position is that they make it sound like normal Americans don’t have to spend their money if they don’t want to.

As badly as America needs tax reform, the “fair tax” (and most other sales tax proposals) are only fair to the rich…

Greg is completely off. First the prebate system completely untaxes the poor because spending up to the poverty level is reimbursed. For a family of four, that's over $20,000 of tax-free spending. The other main point is that the amount you spend in gross will remain virtually the same under the new system after the costs of compliance to the old tax system are removed from the costs of goods and services.

What's fair is that it treats everyone equally, especially producers.

What's fair is that it neuters congress' ability to give tax breaks to lobbyists in exchange for campaign contributions.

What's fair is that individuals are now in control of how much tax they pay by what they choose to spend.

What's fair is that there are no loopholes, and everyone can understand this simple tax system.